If you are choosing a new mortgage, one of the biggest decisions you will need to make is between a fixed-rate mortgage and an adjustable-rate mortgage. While the low upfront cost of adjustable-rate mortgages is tempting, the uncertainty of the future is a major risk. What are the key differences between the two types of mortgages?
Fixed-rate mortgages have a set interest rate that will not change over the lifetime of the loan. While the principal and interest you pay on a month-to-month basis will change, the overall payment will stay exactly the same. In the earlier years of a fixed-rate mortgage, payments will primarily be applied to interest. Fixed-rate mortgages can come in a number of term lengths including 15, 20 and 30 years. 30-year fixed-rate mortgages are the most popular because monthly payments are low, but the overall cost will be higher due to paying so much interest.
Why are fixed-rate mortgages loved by homeowners?
- Rates stay low and constant, regardless of what happens to the economy
- The stability of the rates makes it easy to budget
- Fixed-rate mortgages are easy to understand for first-time homebuyers who are already overwhelmed at the thought of having a mortgage
What are the potential downsides?
- To benefit from lower mortgage rates in the future, fixed-rate homeowners will need to refinance
- These mortgages can be more expensive for borrowers because there is no rate break or early payment
- These mortgages don’t differ as much from lender to lender, so there isn’t much customization to be had
Adjustable-rate mortgages (ARMs) have variable interest rates. While the initial interest rate will be lower than the market rate, the rate will rise over time. If you have the mortgage for a long enough period of time, the interest rate will climb higher than the rates for fixed-rate mortgages. ARMs have a fixed amount of time where the initial lower interest rate will stay stable. After that, the interest rate will change at a pre-set frequency (anywhere from one month to 10 years).
Why are ARMs loved by homeowners?
- ARMs have lower rates and payments early in the loan
- You can benefit from lower interest rates without needing to refinance
- Adjustable-rate mortgages are particularly great for borrowers that don’t want to stay in one place for as long
What are the potential downsides of an adjustable-rate mortgage?
- Rates and payment amounts can rise rapidly over the course of the loan
- The first adjustment of the loan can be a wake-up call since some annual caps will not apply to the initial change
- ARMs can be hard to understand if you have never had a mortgage before and aren’t totally comfortable managing your money
Partner with Equity Mortgage for a Fixed-Rate or Adjustable-Rate Mortgage
We are experienced in getting homeowners the best possible mortgage product for their situation. Since every client is in a different situation, we encourage you to get in touch and learn how we can help. Contact us today by calling 443-471-4310. We look forward to hearing from you!